As we noted before, after 15 years our $11,248 investment is worth $112,453 (the accumulated equity). We have been achieving this Equity Buildup from the property's appreciation (it now has a Market Value of $146,302) and Debt Paydown (we have paid down the loan principal by $11,143). In addition, we are achieving an annual positive Cash Flow. To determine our ROI during the fifteenth year, we add up the annual appreciation ($6,966) plus the annual principal paid ($1,186) plus the annual cash flow ($4,268), which gives us a total annual return of $12,420. To calculate the ROI, we divide that total by the initial investment of $11,248 and get 110.4 percent. This means that during the fifteenth year of our investment we received an annual return of over 110 percent on our money. You can see in the chart that our annual ROI has grown from 37.7 percent in the first year to over 110 percent in the fifteenth year. You can see that in five more years that annual ROI will increase to 152 percent.

This is just part of the picture. It isn't the whole story about how hard your money is working for you. We know your initial investment is working very hard and getting paid very well, and we know that comes from the leverage power of real estate investing. In just this one property you have gained a very strong equity position. As you can see from the chart, at the end of the fifteenth year your accumulated equity stands at $112,453. That is your money too. It can and should be working for you. If you keep it where it is, you can calculate how hard it is working: what it is getting paid. We call this your return on equity, and all we do to calculate it is divide your total annual return ($12,420) by your equity ($112,453). Therefore, in the fifteenth year of this investment your ROE is 11.9 percent. It is still healthy money, and that's a good thing.

However, it's not working as hard for you as it once was. In fact, your ROE has been dropping since you made the investment. It was 16.7 percent in the first year and has been going down ever since. In the next few years it probably will drop to near 11 percent. What is happening, of course, is that as you increase your equity position in the investment, your rate of return on that equity decreases even though you continue to get appreciation, debt paydown, and cash flow.

This phenomenon is what causes Millionaire Real Estate Investors to tap into their accrued equity, pull it out, and reinvest it for greater returns. They want their money, both earned and unearned, to work as hard as possible and get paid as much as it can. Therefore, they continue to leverage that equity back into additional real estate investments, always buying it right with clear Criteria and favorable Terms. Our survey of our millionaires showed that they had a 40 percent equity position in their holdings. Most admitted that they could have used cash flow to pay down more debt and increased their equity more rapidly over time. But they chose to keep building their financial wealth by putting that money back to work at a higher wage. You may be wise to do the same thing. Not only will it get you to the Own a Million level, it can build up an unstoppable momentum that can carry you to the Own Multimillions level.

In our example, let's now reinvest some of the equity and see what happens to the return on equity. Let's say that at the end of year 14 you refinanced your debt and took out some of the equity. You had $104,286 in accumulated equity, which meant you had a 75 percent equity position ($104,286 divided by $139,321). Let's say you wanted to keep a 40 percent equity position ($55, 728) and therefore pulled out $48,558 through refinancing. You now owe $83,592. When we again calculate your return on equity for the fifteenth year, we will use $55,728 as the denominator. With the added debt, your cash flow will be reduced, but you still will achieve a total annual return of $10,004. Your ROE on this property is now back up to 18 percent ($10,004 divided by $55,728). If you also reinvested the $48,558 by acquiring one or two more properties using our Standard Model for investment, that money too would be working at a higher rate of return (16 percent or more). All this equity (capital) is now in the Wealthy Money condition.

The return on investment (or on equity) is similar if you use a 15-year loan (see the chart below). The ROI goes up over time, and the ROE comes down. In this case, equity builds up faster and cash flow is reduced until the loan is paid off in year 15, and then it goes up dramatically. As we said earlier, 30-year loans are safer in that you are more likely to get positive cash flow. Also, you can always make additional payments, reduce the remaining balance of the loan, and accelerate the payoff.

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